Facebook faces reality as shares tumble below offering price

Facebook shares tumbled below their offering price in the second day of trading as the underwriters of Friday’s stock sale stopped supporting it and investors began to realize there may be less to the company than meets the eye.

The stock fell $4.20 today to $34.03, a decline of almost 11 percent. Morgan Stanley, which handled last week’s IPO, propped up the stock Friday by buying shares to keep them from dipping below the offering price. Without that support, the shares fell today as soon as trading opened.

It looks like they’re through spending their own money to support the price. Shareholders are lined up at the gate –they want out.

They want out because it’s now clear the offering was overpriced, and it was overpriced because too many people bought into the hype surrounding social media without studying the business model. Sure, Facebook has more than 900 million users, but they don’t pay to post the intimate details of their lives on their Facebook pages. For revenue, Facebook relies on ads, and although it’s one of the biggest sellers of online advertising, it’s not clear how effective that advertising is.

What’s more, Facebook hasn’t figured out how to leverage its advertising to mobile users in the same way it did on the Web.

Even if you look past those longer-term issues, Facebook’s IPO was overpriced on the fundamentals. As Bloomberg points out, the company was priced at 107 times trailing 12-month earnings, which exceeds just about every member of the Standard & Poor’s 500 Index except Amazon and Equity Residential.

A 12-figure valuation on a company that made less than $4bn in sales last year implies stratospheric growth for years, driven by a business model that – as management readily admits – is not yet fully formed.